AD analysis left-field questions

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AD analysis left-field questions

Postby rmivalue » Thu Feb 02, 2012 4:47 pm

I had a few side/random questions from the accretion dilution analysis.

Finance ONLY purchase price equity (& NOT EV), as quick/dirty model/anal?
In other words, I would think that financing would FUND EV (if there is debt, that debt would most likely be refinanced/ repaid/retired, or less commonly, assumed/rollover), but most accretion dilution analysis I see FUND ONLY the EQUITY OR OFFER VALUE = (target undisturbed price + prem) * target FD shares (is this because the analysis is quick and dirty and not detailed/complexed)?

PF NI (of both stand-alone cos) is probably marginal/PF (not necessarily normalized/cleansed)?
In other words, I would think that NI of buyer + NI of target SHOULD BE normalized but may sometimes contain marginal one-time items for PF EPS purposes?

Side questions:
For tax rate, I'm thinking that it is usually the statutory rate (adjusted for PF/marginal/forecast factors)?

For PF debt interest rate% (depending on which debt tranche is used for financing), I'm thinking that is the blended/average book (footnote) rate (adjusted for PF/marginal/forecast factors/variables)?

It appears that the accretion dilution analysis is an EPS / income statement / non-cash / accrual analysis - as such it seems like it is not entirely relevant as a cash effect/consequence analysis. If so, how relevant is a cash effect/consequence analysis (I'm thinking that it is relevant but less so, and that these metrics are reflected in the PF leverage/capitalization and ownership statistics)?

How relevant is the additional/incremental (tax deductible or not) D&A ex from asset step/write-up? It seems like alot of the PPA % allocation assumptions originate from in-depth accountant analysis/review, and that its hard to plainly make "standard" assumptions for practical modeling purposes.

Fees are arguably one time items. However, I have seen them included in some (probably) detailed analysis. Should they be included (I didn't see that in WST version). In likely a detailed (more full blown / integrated merger) analysis/model, I would think that the non-financing fees would affect the uses (and thus sources) of funds resulting in higher EV and thus financing costs (to fund that higher EV); financing fees would be capitalized in BS and result in additional amortization costs in P&L and thus lower PF EPS.
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Re: AD analysis left-field questions

Postby wsthost » Mon Mar 05, 2012 8:05 am

1) Yes, generally, the debt is assumed or refinanced and as such, only the Equity portion is financed (ie 50/50).

2) Always use normalized figures; please clarify your question.

3) Tax rate is usually the marginal statutory tax rate, correct.

4) Similarly, interest rate would be the marginal cost of new debt for the acquisition; for simplicity, use current weighted average YTM of acquiror's debt, unless other information is available; per our complex M&A models, we estimate and split into specific tranches and types of debt with associated interest rates.

5) Correct, A/D is an accrual analysis. for Cash EPS A/D, one would make adjustments to EPS. Pre-FASB 141/142, this was generally done for goodwill amortization; nothing else is material enough to impact.

6) Relevant for companies with a lot of hard assets (manufacturers with PPE & inventory, etc); else it's not all that relevant, especially for service based businesses. However, for other businesses, like pharma, PPA is important for intangibles (but that's not FMV step-up related).

7) In our Complex M&A class, and even our Simple Merger Model (and Intermediate) we do include fees in Sources & Uses of funds. A/D is a back-of-the-envelope analysis for quick & dirty; we usually say A/D analysis captures 90% of the "final" answer; our Simple Merger Model captures 95%; our Intermediate Merger Model captures 97%; and our super-complex one captures 99% (of course, garbage in, garbage out applies).
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